Video: Managing your debt repayment goals

Nicole Robitaille: So I'm Nicole Robitaille, I work at the Queen's Smith School of Business at Queen's University.

And we're hearing a lot today about how people are really stressed about their debt; it's something that weighs on them heavily than a lot of their other stressors in their lives. We know this is a goal for people to pay down these debts but we see that the debt numbers in Canada are rising. People are having more and more debt.

And so, what I'm going to talk about today is a little bit of research looking at what are the specific features of our goals, when we have these goals to pay down our debt, and the way we think about the progress we're making that can change how we are ultimately successful at reaching these outcomes or helping ourselves pay down the debt.

And so, I'm going to speak about one specific feature of the goals themselves: what can we do to make ourselves have stronger goals and make it more likely that we're ultimately going to succeed, and once we've made progress towards these goals, how do we keep moving forward and continue the momentum that we're building this snowball effect almost.

And the first thing I want to talk about is we keep talking about paying down debt, well that's a really high level goal. It's hard for consumers to think about what they need to do first, where should they act. So we have these sub-goals. Okay, we're going to start, we're going to pay down the credit card. So I want to get rid of this credit card debt. Well which credit card do I pay off first? Do I pay off the high interest rate? Do I pay off the big balance? Clearly from our last two presentations, that's not an obvious decision either.

And so having these goals without a plan, when we have these really good intentions, we have the goals to get out of debt, but we don’t have a plan to do so, what happens is we tend to not to decide; we might procrastinate. This month we're not gonna make a decision, we'll pay the minimums, then we'll figure out what we're going to do. And we see that life gets in the way a lot of times and we end up not making decisions.

And so what we need to do is leverage some of the research on how we could set better goals for ourselves. And one way to do this is to set implementation intentions to create goals that are a lot more specific. So if you can specify in your goal, not just that you want to pay down debt, but how are you going to do that, when are you going to do it by, and where specifically, what are you going to specifically pay off.

Implementation intentions aren’t a new idea. They’ve been found to be very effective for things like getting people to show up to vote or getting ourselves to go get flu shots. And so in the experiment, we looked at using these implementation intentions for getting tax payers to pay their tax debts and to file their taxes. So we looked at a large number, in this case the tax payers were organisations, and we looked at a lot of organisations who were late at filing and paying their taxes, and we took the standard letter and we created an experimental letter that basically took the same information, but it included these implementation intentions, so they told him where to file, how to file, when to file.

And so for all late tax organisations, thousands of organisations, we had 85,000 organisations as part of the experiment, we randomized them to receive either the experimental letter or the control letter. Keep in mind, 97% of these organisations file this tax every year; they know where to file, they know when it's due. And the original letter is telling them you need to file this tax, you're late, it's due immediately. Immediately is also a very broad goal, so we gave them a much more specific deadline by which they needed to file. File by May 2nd. Why May 2nd? We chose May 2nd because that's when additional collections efforts begin in this jurisdiction. So it's very expensive for the government after these ten days because they have to call the firms, they have to follow-up, and it's very, very expensive to get the money.

And so what we find, just adding these implementation intentions leads firms to file significantly faster. So we see -- it takes them five days fewer to file on average. Even after -- you see at the ten day point, there's a huge difference between the two firm. Even after 16 weeks of collection efforts, that's when we start to see the effect being eroded. It takes 16 weeks of additional efforts, phone calls, follow-up letters, additional penalties before we even see the effects to disappear, hundreds of thousands of dollars collected faster, thousands of dollars of saving for the government. Really simple thing to do. So these planning prompts are incredibly effective in not just getting people to act but getting people to act now, not procrastinate, making a decision.

In addition, this experiment was run over multiple years. So what we were able to do was look at firms, whether they received the experimental or control letter over time, and what is the effect. And this is really important in this context because if implementation intentions only work because they're novel, because it's new, because it's different, then we're not going to see them being effective over time. We need something that's going to work after a period of exposure, and that's exactly what we found. They were equally effective when organisations were exposed to this type of messaging numerous times.

We also find that timing matters. So if firms receive this information one year, we don’t see it having an impact on their behaviour in subsequent years. You need to set these plans at the time in which you're making decisions. So just having a plan one year isn’t good enough; you need to update your plans and have current plans on implementation intentions that are frequently being updated for them to be effective at you reaching your goals.

The second study I wanted to talk about is about maintaining progress. So once we've done a good decision, how do we keep moving forward? So this is important because there is a lot of research that shows that once we've done good, made some progress, we're feeling pretty good about ourselves, we're very likely to license ourselves. So I've paid my bill, I feel pretty good, so now I am going to spend a little more. I've paid of this credit card. I feel like I've just done this huge leap, now I am going to do something bad afterwards.

And so I've done a lot of research on the licencing effect, and we looked at was how can we mitigate this effect? And this effect has been found to occur not just for payments but also for healthy behaviours, for moral behaviours, for self-interested behaviours. And what we found is that if we can help people experience a sense of closure — so closure is a sense that an experience is complete, it's part of the past, it's finished with that good deed. So I've paid the bill but that's complete and it's part of the past. What it does is that it evokes less emotions, and it's less top of mind, so it's not something that is immediately accessible in memory, so if it's less top of mind, if it's evoking less emotions, it's less likely to guide subsequent behaviour.

So in one experiment, just to show, we had people think about the good deeds that they had previously done, and we saw that after they had done good deeds consistent with this licencing effect, they were significantly more likely to behave in a selfish manner, self-interested indulgent manner following. So these are immoral intentions, of things like if a cashier gave you too much money, how likely would you be to return the money back to the cashier. How likely would you be to cheat for financial gains? There were a number of questions, but people were much more willing to do that after they had done something good. But when they engaged in an act of closure and periods of various psychological manipulation of putting that within an envelope, it's used a lot like in dating, if you can close something or burn it and put it away, this effect goes away.

So how do we do this now when we think about our financial goals in paying down our debt? So we've made some progress, how do we get closure? What we need to do is set mental boundaries. We need to think about mental accounting and how we think about our money. And we need to set these boundaries between what we've done and what we're going to do.

And so, just think about at the end of year when we move from an old year to a new year, it feels like we're having a fresh start, and we can start again and that's complete and part of the past. And so if you do this with your budgeting as well or with debt repayment, once you've made some progress, if you can get the sense that that's complete and you're moving forward, you're more likely to continue doing good afterwards. And a lot of the budgeting apps already do this a little bit, so you can see that you have a monthly goal, how are you doing this month, and then at the next month you start all over again and you start fresh.

So even if you've done really good that month staying on budget, the next month it starts fresh again, and that helps you maintain and move forward. And when this happens, you are much more likely to show these types of consistency effect whereby you've done good and now you're more likely to do good afterwards.

So what I want to argue is we just don’t need to think about debt repayment strategies per se, but we also need to think about the ways in which people make decisions, when they make their decisions, how they feel about the progress that they've made and use these things as well to help design better strategies to help people pay down their household debts. Thank you.